Thomas Dubinski - VP & CFO Mark Emalfarb - President & CEO.

Barry Kitt - Pinnacle Fund.

Good day, ladies and gentlemen, and thank you for holding. Welcome to Dyadic International's Third Quarter 2017 Financial Results Conference Call. Now all participants are in a listen-only mode. My name is Catherine, and I'll be your conference coordinator today. As a reminder, please note that this call is being recorded.

Now I would like to introduce your host for today's call, Tom Dubinski, Dyadic's Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you, Catherine. Good day, and thank you for joining today's conference call to discuss Dyadic's results for the quarter ended September 30, 2017 which were reported in a press release issued earlier today. The press release and Dyadic's quarterly report have been posted to both the Dyadic and the OTC Markets websites.

I'm joined today by Dyadic's President and Chief Executive Officer, Mark Emalfarb. On today's call, Mark will cover operating highlights, further details on our corporate strategy, and a summary of our research and business development efforts. I will close with a review of our financial results in more detail.

We will then provide you an opportunity to ask questions. Dr. Ronen Tchelet, our VP of Research & Development will join Mark and I during the Q&A to answer questions directed to him. Each caller will be allowed one question and one follow-up question to provide all callers an opportunity to participate.

If time permits, the operator will allow additional questions from those who have already spoken.

Before we begin, we would like to remind you that certain commentary made in this conference call may be forward-looking statements, which involve risks and uncertainties that could cause Dyadic's actual results, performance, scientific or otherwise or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Dyadic expressly disclaims any intent or obligation to update any forward-looking statements except as required by law. I will now turn the call over to our President and CEO, Mark Emalfarb..

Thank you, Tom. Good evening, everyone.

I am very pleased to report that we are continuing to make good progress towards our goal of developing our C1 technology platform, and to leading next-generation protein expression and production system, which has the potential to speed up the development, lower production costs, and improve the performance of biologic vaccines and drugs at flexible commercial scale.

We have been extremely busy over the past nine months. I would like to provide you with a brief overview of some of our many activities.

We are making good progress in our research programs as we continue to develop what we strongly believe has the potential to be a disruptive next-generation protein expression and production system based upon the proprietary C1 technology.

In less than a year, our research has resulted in our ability to shorten the timeframe in which we can express genes of interest and produce the products of genes such as monoclonal antibodies at higher levels with better stability by using improved C1 strains.

Using new and improved C1 base strains, along with better molecular tools, which has now been developed over the past year at our prime CRO, the company now has an initial data set to begin to demonstrate C1’s potential ability to express monoclonal antibodies that are secreted, folded and bind in a similar manner to other established cell host technologies commonly used in the industry.

C1 glycoengineering work has recently begun. Research data achieved to date is in line with what we expected, and continues to support management’s belief that C1 has the potential to be used for the development and manufacturing of animal and human biopharmaceuticals.

In addition to glycoengineering, the Company is continuing its research efforts with focus on further enhancing protein stability and improving yields. We have recently generated preliminary data to suggest mass produced C1 have very similar binding properties to mass produced using CHO cell.

The C1 cell line is a scientific anomaly compared to other filamentous fungal cells, and the company believes these characteristics provide C1 with certain competitive advantages compared to other leading pharmaceutical expression systems such as CHO, Chinese hamster ovary, cells.

We have expanded and strengthened our R&D capabilities, and have recently signed an agreement with a biotech company to see if C1 can help them overcome the current gene expression challenges with one of their drug candidates.

We have entered into previously announced research agreements with BDI, which has much needed additional research and development capabilities, and provides for the potential development of internal biologic vaccine, and our mAbs products from designated C1 based product candidates.

In addition, this R&D capability is expected to enable us to further improve the C1 biomanufacturing process leading to higher productivity.

The primary rationale for this collaboration agreement is the potential acceleration of certain proof of concept research and data generation, which we believe could be utilized to support our business development and licensing efforts, as well as to further develop our research and development capabilities, such as providing Dyadic and its collaborators with additional C1 gene expression capability and C1 fermentation optimization under cGMP conditions.

As previously reported, we conducted our formal research – we concluded our formal research services agreement with DuPont, and successfully transitioned our C1 platform research programs to our two contract research organizations.

The conclusion of the DuPont research agreement has also removed the potential obstacle in attracting other research collaborations. Our research partners had expressed some concerns regarding DuPont’s conflicts that could arise as DuPont could be viewed as a potential competitor.

As a result, using a CRO that is technically qualified and financially independent became important. We have made significant progress towards raising awareness of C1’s potential. We continue to push every relevant door in our business development efforts.

We have been relentless and networking with a largest and both prestigious biotech and pharma companies in the world. We are pursuing research and development collaborations, licensing arrangements and other commercial opportunities to further leverage and position the adoption of the C1 technology in the biopharmaceutical industry.

We are raising C1’s profile by attending, speaking and making presentations to the biopharmaceutical industry as well as holding business development and scientific collaboration meetings with interested parties, including on-site scientific meetings at our CRO facilities, to present both the CROs and C1’s capabilities to potential collaborators.

These efforts have resulted in the company securing 80 plus confidential disclosure agreements, CDAs, to-date which has led to the previously announced research agreements, a recent and challenging gene expression project with a publicly traded biotech company to try and help them express their drug at higher levels, and a variety of other potential collaboration and research discussions with several of the top global biopharmaceutical companies.

I have previously described a lengthy process from an initial contract to a signed agreement, getting to an executive research agreement with big pharma is not easy.

We have and continue to receive various levels of interest from our business development efforts with tier 1 and tier 2 biopharma and biotech companies, who are now more aware of and in many cases showing interest and continuing to learn more by how the C1 technology may help them in biologics development and manufacturing programs.

From these discussions we still anticipate entering into one or more third-party funded research programs. However, it is proving difficult to predict the timing. As we have discussed previously, we entered into two proof of concept research programs with some of the world's largest pharmaceutical companies.

In July, we fulfilled our remaining obligations in connection with the DuPont transition resulting in the release of approximately $7.4 million of sale proceeds held in escrow.

As previously reported, our board of directors authorized a new one-year stock repurchase program, under which the Company may repurchase up to $5 million of its outstanding common stock.

The objectives of this program are the same as our prior successfully completed $15 million stock repurchase program, which is the opportunistic use of the company’s cash and to provide liquidity for shareholders.

As of November 9, 2017, the Company has purchased a total of 32,500 shares of stock at a weighted average price of $1.40 per share in open market transactions under this new stock repurchase plan. I would like to provide you with some perspective on our industry end market.

We believe that the biopharmaceutical market is an attractive opportunity to apply our C1 technology. The four segments of the market that the company is addressing are recombinant vaccines market, new biologics market, biosimilars, biobetters, non-glycosylated protein market, biosimilars, biobetters, -glycosylated protein markets.

The use of biologic medicines such as antibodies is growing fast in the biopharmaceutical industry. However, biologic medicines are very expensive; treatments to both patients and healthcare systems. And we believe that such high-cost is a result of the following bottlenecks in the development and manufacture of biologic medicines.

Low yielding gene expression systems utilized by the biopharmaceutical industry, under funded development efforts for more efficient, next-generation gene expression system.

The biopharmaceutical industry’s reluctance in the past to utilize advances in science such as synthetic biology and genomics to develop next-generation gene expression systems for biomanufacturing; such as glycoengineering potentially more productive microorganisms.

We believe that further engineering our C1 technology it could have the potential to be an alternative to CHO, and other expression systems for certain biologic vaccines and drugs. It is not just something we believe. The industry is slowly moving towards that conclusion as evidenced by recent articles in the subject, C1 could be the showstopper.

We are working with the pharmaceutical industry, governmental agencies and academic community to demonstrate C1’s potential to eliminate bottlenecks and overcome challenges in developing and manufacturing biologics, and to speed up the adoption of new technologies. Our initial efforts to target the biodefense sector appear to be bearing fruit.

I recently went to Washington DC, where I made separate presentations to bio and DTRA, the US Defense Threat Reduction Agency, to begin positioning C1 to rapidly combat emerging diseases and threats.

Additionally, we expected in early 2018 a research product will begin with a renowned foreign research institute, who wants to use C1 in internal research projects to help them overcome certain gene expression challenges in their antigen and antibody research to combat emerging diseases and threats.

This research is expected to be fully funded and will be done in their labs, not ours due to the sensitivity and importance of the biodefense work to be conducted.

Our hope is that C1 may help accelerate and better prepare this country, the US and our allies, to be better prepared to combat emerging diseases and threats, and translate into other vaccine and antibody development projects, animal studies, and eventually potentially even accelerated regulatory approvals in the future.

Now more than ever we continue to be optimistic about our future and our ability to create value for our shareholders, driving our own research and development programs, and through collaborative agreements with big and small biotech and biopharmaceutical companies.

The bottom line is that the research programs we are targeting and that we have embarked upon are being carried out to further demonstrate the versatility and utility of the C1 technology platform for use in the biopharmaceutical industry. The message is reaching the market and the market appears to recognize the need for a CHO replacement.

As evidenced by last week’s biopharma reported article, bioprocessing survey report, is the CHO train slowing down. Nearly half the respondents from this global volume manufacturing survey, approximately 45%, believe we are too reliant on Chinese hamster ovaries, CHO expression systems versus approximately only 22% that [indiscernible] with CHO.

On December 7, 2016, the shareholders' approved a potential reverse stock split for the company to meet one of the requirements for a potential up-listing of the Company's stock from the OTC Markets to NASDAQ.

Our Board of Directors has concluded that the significant expense and distraction of an up-listing would not be in the best interest of the Company or its shareholders at this time. Accordingly, the Company has decided not to effectuate a reverse split prior to the December 6, 2017 shareholder approved deadline.

If the science and business develops as we expect we will reassess our strategic alternatives, which could include becoming an SEC reporting company and up-listing to NASDAQ, or another stock exchange; continuing to build the business organically, entering into licenses through C1 technology, collaboration and M&A transaction for the outright sale of the business.

We are in an enviable position as we currently do not need any additional capital to fund our planned R&D efforts, enabling us to avoid the significant cost and distraction of an up listing that would otherwise be required to raise funding for our scientific programs.

We are laser focused on obtaining the necessary data and research, and our licensing collaborations, which we anticipate will create significant value for our shareholders. The management and our board truly believe that the investments we are making and our C1 technology are dollars well spent, and will lead to greater shareholder value.

We believe our upside potential far outweigh the risks. I will now turn the call over to Tom Dubinski, our Chief Financial Officer, to discuss the financial results..

Thank you, Mark. At September 30, 2017, cash and cash equivalents were approximately $5.6 million, compared to $6.9 million at December 31, 2016. The carrying value of investment grade securities including interest receivable as September, 2017 was approximately $45.5 million compared to $43.6 million at December 31, 2016.

The net decrease in cash and cash equivalents for the nine months ended September 30, 2017 of approximately $1.3 million principally reflects cash used in the repurchase of common stock of $5.7 million, cash used in operations of $4.2 million, The upfront payment of the previously announced BDI R&D agreement of $1.3 million, and cash used to purchase investment grade securities net of proceeds for maturities in interest of $1.5 million.

Offset by cash received from escrow funds of $7.4 million, cash received from a litigation settlement net of related costs of $3.7 million, and the favorable effective exchange rate changes on cash of $300,000.

The net loss for the quarter ended September 30, 2017 was approximately $1.5 million or $0.05 per basic and diluted share compared to a net loss of $1.2 million or $0.03 per basic and diluted share for the same period a year ago.

The net loss for the nine month period of 2017 was approximately $800,000 or $0.03 per basic and diluted share, compared to a net loss of $1.5 million or $0.04 per basic and diluted share for the same period a year ago. The net loss reported in 2017 and 2016 included litigation proceeds of $4.4 million and $2.1 million respectively.

R&D revenue for the nine month period of 2017 increased approximately $600,000 compared to $100,000 for the same period a year ago. Cost of revenue for the nine month period of 2017 increased to approximately $542,000 compared to $99,000 for the same period a year ago.

The increase in R&D revenue and cost reflects the activities of the ZAPI project and two confidential biopharmaceutical research projects that began in December of 2016 and June of 2017 respectively. The provision for contract losses for the nine month period of 2017 increased to approximately $221,000 compared to zero for the same period last year.

The amount of the provision for contract process reflects the increase in the total estimated research cost due to the company's extended involvement in the ZAPI program. There was no provision for contract losses for the quarter ended September 30, 2017 and 2016.

R&D expenses for the nine month period of 2017 increased 58.8% to approximately $1.5 million compared to $964,000 for the same period a year ago. The increase principally reflects the cost of biopharmaceutical contract research initiatives, research program costs related to BDI R&D agreements and personnel related costs.

General and administrative expenses for the nine month period of 2017 increased 42% to approximately $4.2 million compared to $2.9 million for the same period a year ago.

The increase principally reflects trial litigation costs of $372,000; financial reporting and business development resource costs of $376,000; professional service costs associated with the BDI R&D agreements of $314,000 and the new employment agreements for executives of $267,000.

These increases were partially offset by reductions in insurance and other costs of approximately $100,000. Foreign currency exchange gains for the nine-month period of 2017 were approximately $243,000 compared to $79,000 for the same period a year ago. The change principally reflects the strengthening of the euro in comparison to the U.S. dollar.

Interest income for the nine month period of 2017 increased 17% to approximately $401,000 compared to $343,000 for the same period a year ago. The increase in interest income reflects earnings on the company's investment grade securities, which are classified as held to maturity.

We anticipate that our cash burn for the balance of 2017 will approximate $6 million and we expect to end the year with cash per share in the range of approximately $1.71 to $1.72. I'd like to turn the call back to our operators to take your questions.

Catherine?.

[Operator Instructions] We'll take a question from Barry Kitt with Pinnacle Fund..

Hi, guys. I am sorry. We had a lot of calls going on with earnings. I missed some of that.

Could you tell me what the cash burn from operations was for the quarter Tom?.

Through September, the cash burn is $4.2 million, and….

Tom, do you have it just for the September quarter?.

$2 million..

From operations?.

Yes..

And what does that make it for the fourth quarter then?.

Well, that does not include the fee up, the 1.3 million we spent in the upfront payment to BDI. So in total it would be 3.3 million including the BDI prepayment..

Okay. And you expect to end the year $1.71, $1.72 in cash..

Yes, sir..

Mark, with the agreements you have with big pharma players, and – is there any opportunity for revenue from those partnerships, if you will between now and the end of 2018, or is it too early to speculate on that?.

Well, it is too early to speculate on anything, but we are going to get some revenue in 2018 from at least one of them.

We are hoping that another one will re-up and actually we are hoping to bring in an additional one or two more, maybe three more and so there is additional revenue to come in from [indiscernible] and potentially others, but the timing of all that is hard to predict..

Yes, I guess what I wanted to try and do is to get where the cash would be at the end of next year if you burned a similar as you might expect to burn in the fourth quarter of this year, can you help me out with that Tom?.

Well, we typically don't like to provide that long a guidance on cash flow Barry, but I think we are thinking that roughly….

And I'm not asking you to project where it will be. I'm just trying to say if the operations next year were similar to the operations this year, and you had no benefit from these partnerships and we just burnt the same amount we burnt this year, I'm just trying to get an idea of where cash would be at the end of next year.

Not asking you to make predictions that it will be there..

Yes, no. I understand. Just obviously I'm going to be cautious about what we provide, but I believe overall that we will approximately end the year similar in the mid-1.40s at the end of ’18, middle of 2019..

Okay, thank you very much. I appreciate it..

[Operator Instructions] And with no additional questions, I would like to turn the conference back over to Mr. Emalfarb for any additional or closing remarks..

Thank you, Catherine. We are very excited about our potential research and development and business opportunities in the pipeline, and we believe that 2017 is an important year, and that 2018 will be even more important for the future development of the C1 technology and for Dyadic to grow in the pharmaceutical sector.

I want to take this opportunity to thank our very hard working employees and consultants and our dedicated Board of Directors, our research partners and shareholders for their support. Thank you all who have taken the time to participate on today's conference call..

Thank you again. Ladies and gentlemen that does conclude today’s program. You may now disconnect..